By Steve Viuker
Benjamin M. Lawsky, superintendent of financial services, announced in late July that the New York State Department of Financial Services (DFS) has issued for public comment a proposed “BitLicense” regulatory framework for New York virtual currency businesses. The proposed regulatory framework – which is the product of a nearly year-long DFS inquiry, including public hearings that the department held in January 2014 – contains consumer protection, anti-money laundering compliance, and cyber security rules tailored for virtual currency firms.
Lawsky stated that the DFS has sought to strike “an appropriate balance” between consumer protection and deterrence of illegal activity, and the need to support beneficial innovation, which the DFS says is vital to the long-term future of virtual currency.
In accordance with the New York State Administrative Procedures Act (SAPA), the proposed DFS rules for virtual currency firms was published in the New York State Register’s July 23, 2014, edition, which began a 45-day public comment period. With the end of that period, the rules are subject to additional review and revision based on that public feedback before DFS finalizes them.
Lawsky said that New York State, as the first to submit specially tailored rules for virtual currency firms, recognizes that continued public feedback is critical to finalizing the regulatory framework.
In a July email to tech website Ars Technica, Wedbush Securities Analyst Gil Luria said that New York, with the largest concentration of financial firms and the most active regulation and enforcement action, might encourage other states to adopt a similar framework. “It is also possible other regulators, such as the Securities and Exchange Commission and the Federal Reserve, would decide to adopt this framework or accept the NYDFS standard. If that happens, these companies would be able to conduct business outside of New York as well,” he wrote.
Roger Ver, a bitcoin business investor, believes that if adopted, the rules will drive bitcoin-based businesses out of New York. Ver told wired.com, “These men calling themselves government are not asking anybody to do anything. They are making demands, and will put us behind bars if we don’t obey. Bitcoin was specifically designed to strip away power from men who would be so presumptuous to believe that they have the right to rule over others.”
Questions of Insurability
Insurers have been hesitant to provide coverage to businesses that operate on virtual currency. “Insurance companies do not understand bitcoin and even fear it,” Xapo CEO Wences Casares told CoinDesk. Earlier this year Lloyd’s was the first to offer coverage to Elliptic Vault, a bitcoin storage service, but the deal fell through. Other insurers have since joined the arena.
In June, Great American Insurance Group announced that it will offer virtual currency coverage through its Fidelity/Crime Division to both commercial and government policyholders. In a statement, Great American said that “Standard crime insurance policies, including Great American’s crime policy, currently do not automatically provide coverage for virtual peer-to-peer mediums of exchange. Crime insurance coverage for Bitcoins can now be granted by an endorsement to an existing crime policy.” Coverage is available in most states.
Bermuda-based Meridian Insurance offers virtual currency coverage to Xapo, an online bitcoin vault based in California. Senior Vice President of Business Development Ted Rogers told CoinDesk that the company’s policy is “much larger than $15 million” and part of the reserve is held in bitcoins.
“In our view, the BitLicense application requirements are extensive – given that the industry is in its early stages of development the requirements or some elements thereof may be challenging for companies to meet,” said Margo Tank, a partner at Buckley Sandler.
Tank said that “the proposed rule requires a number of significant programs, record-keeping and reporting requirements regarding consumer protection, cybersecurity and anti-money laundering, including a requirement that SARs be filed with the DFS. As proposed it could necessitate material changes to many businesses – such as changes to an existing product or service requiring prior written approval, and there appears to be no time limit in which to provide such approval. Finally, the rule offers extremely limited exceptions to those who are required to apply for a license, excluding only merchants and consumers, as well as those chartered under New York Banking Law, to conduct exchange services and are approved by the superintendent to engage in exchange activity.”
Tank believes the critical issue for the DFS will be striking a balance between ensuring the safety and soundness of entities holding consumer funds/assets and encouraging continued growth and innovation in the virtual currency community.